Bharti Airtel: Hotline

Higher ARPU for fixed line and licence fee cut aid Bharti Airtel

Driven by the better performance of its landline businesses and a cut in licence fees, Bharti Airtel has posted a higher operating profit margin (OPM) for Q4 FY06 at 37.5 per cent, a rise of 50 basis points q-o-q.

The sequential revenue growth was 12.7 per cent at Rs 3,411 crore, though revenues from the mobile segment grew at just 11 per cent in the quarter. That's despite a much higher subscriber growth of 20 per cent q-o-q, signalling the impact of falling tariffs in an intensely competitive environment.

Thanks to lower interest and tax charges, the reported net profit for the March quarter has grown at 25 per cent q-o-q. Bharti has done well, though to end FY06 with revenues of Rs 11,663 crore and an OPM of 37.4 per cent.

About 98 per cent of net additions in Q4 FY06 came from pre-paid customers and an increasing number of customers are opting for lifetime pre-paid scheme, realisations from which are initially low.

Thus, the average revenue per user (ARPU), has fallen in the March quarter to Rs 442 from Rs 470 in the December quarter and margins for the mobile business have remained at around 36.5 per cent for last few quarters. However, the average minutes of use per subscriber for the mobile segment is up at 431 minutes from 411 minutes in the December quarter.

The ARPU for the fixed line segment is high at over Rs 1,000. Despite the strong pace of growth, Bharti's capital productivity has been stagnant at 60 per cent compared with 62 per cent last March. Continuing capital expenditure and intense competition could keep margins under pressure.

At the current price of Rs 406, the stock trades at around 23 times FY07 and18 times FY08. The stock has outperformed the market over the past year, but much of the upsides appear to be priced in.

HLL: Rural magic

HLL has posted a fine set of numbers once again. Operating profit went up by 35.8 per cent y-o-y to Rs 330.55 crore on the back of a sales growth of 11.6 per cent. Rural demand remained strong, and in most categories the company either improved or maintained market share.

Home and personal care (HPC) division grew at 20 per cent, with strong growth in its detergent and shampoo brands. In the December quarter, HPC had grown at 17.3 per cent. Soaps and detergents grew at 16 per cent, while the personal products business improved by about 27.1 per cent.

Both Lifebuoy and Sunsilk were re-launched in the March 2006 quarter. The foods business posted a 10.8 per cent improvement in sales as processed foods and ice-creams grew at around 30 per cent. Beverages grew at 5 per cent, mainly because of better coffee sales, while tea grew marginally.

In spite of input cost pressure owing to higher crude prices, HLL's adjusted material costs went up by 5.3 per cent only. The company increased is advertising and promotion expenses by 45 per cent during the quarter, being an investment in its brands.

As a result, operating profit margin improved by 210 basis points to 11.8 per cent. The HLL stock gained about 1.2 per cent on Friday, and trades at estimated CY06 P/E of about 38 times, which does not leave too much room for further appreciation.

Zee: The odd twist

It has not been a happy ending for Zee Telefilms. The last quarter for FY06 has seen revenues grow by just over 10 per cent while the operating profit has dropped 38 per cent.

Even in the December quarter, Zee had grown its revenues by 17 per cent. While the operating losses for the new businesses have come down to Rs 52.4 crore from Rs 59.7 crore in Q3FY06, the new channels""Zee Telegu, Zee Smile and Zee Sports"" it appears, will take considerable time to start making money.

But, even if one were to consider just the existing businesses, the rise in the operating profit in Q4FY06, has been a poor 4.8 per cent. Thus, full year revenues are up just 11.5 per cent at Rs 1423.3 crore while the operating profit has slipped 37.3 per cent to Rs 270.2 and the operating profit margin to Rs 18.9 per cent from 33.8 per cent in FY05.

The market, however, seems to be looking ahead which is probably why the stock rose 7 per cent in Friday's trade. The advertisement hikes that it has taken should be reflected in next year's numbers. Zee's programmes are becoming more popular, but the viewership needs to sustain for it to cash in on the good environment.

Moreover, it needs to be able to exploit the cricket and football rights. The proposed restructuring would bring greater focus to the businesses, but the competition in each of the segments, especially DTH, where Tata Sky will be making an entry, will be keen.

At the current price of Rs 264, the stock trades at 36 times estimated FY07 earnings and appears to be reasonably valued.